Show work and explain please for lifesaver... This is a world with NO TAXES (per

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Show work and explain please for lifesaver...

This is a world with NO TAXES (perfect capital markets).The firm is a no growth firm and pays out all of its earnings as dividends.It is originally all equity financed (unlevered).The firm decides to issue $500,000 in debt to repurchase stock.The cost of debt is 4%.Fill in ALL the missing values in the table.

Unlevered

Levered

EBIT

200,000

200,000

INTEREST

0

20,000

Earnings (Net Income)

200,000

180,000

#Shares

20,000

rA

8%

8%

rE

8%

EPS

$10.00

Price

Unlevered

Levered

EBIT

200,000

200,000

INTEREST

0

20,000

Earnings (Net Income)

200,000

180,000

#Shares

20,000

rA

8%

8%

rE

8%

EPS

$10.00

Price

Explanation / Answer

Levered

To calculate the price of the share we will use the following formula: Total Equity / number of shares

To find the total equity we will use the formula as:

EBIT *(1-tax rate) / cost of equity = 200,000 (1-0) / .08 or 8% = 2,500,000

So, the price of unlevered share = 2,500,000 / 20,000 = 125

Since we have the price of the unlevered share we can find the number of share repurchased

Number of share repurchased = Total Value of debt issued to repurchase share / price per share

= 500,000 / 125 = 4,000

Now the total outstanding share in the market after repurchase of the stock = 20,000 - 4,000 = 16,000

Since, we now know the number of total share outstanding in the market we can find out new EPS

New EPS = (EBIT - Interest) / number of share outstanding = (200,000 - 20,000) / 16,000 = 180,000 / 16,000 = $11.25

In order to find the levered rE we need to find Debt equity ratio.

We have 500,000 as debt and 2,000,000 as equity (2,500,000 - 500,000)

So, our Debt Equity ratio = Debt / Equity = 500,000 / 2,000,000 - = 1:4 or 0.25

Then our levered rE = Unlevered rE + (Unlvered rE - cost of debt ) *Debt equity ratio

                            = .08 + (.08 - .04) *.25

                            = .08 + ( .04).25 = .08+.01 = .09 or 9 %

New Price per share = Total Capital / number of share outstanding = 2,500,000 / 16000 = $156.25

Unlevered

Levered

EBIT 200,000 200,000 Interest 0 20,000 Earning (Net income) 200,000 180,000 #Shares 20,000 16,000 rA 8% 8% rE 8% 9% EPS $10.00 $11.25 Price $125 $156.25

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